Eyewitnesses said that about 20 shots was heard before police arrived at the incident site.

A man was shot dead today by Australian police who ended a hostage crisis at an apartment in south eastern suburb of Melbourne where a woman was held captive and a body of another man was found.

The woman escaped safely but three officers were injured as police stormed the building to end the hostage situation.

According to reports, the police operation was launched at the Bay Street apartment in Brighton following reports of an explosion at 4 PM (Local time).

The emergency services, including State Emergency Service (SES) crews, were called to the scene where they also located the body of a man who appeared to have been shot in the foyer of the building.

A woman was held hostage by a suspect who was later shot dead by police in a volley of gunfire in the apartment block.

"A man has been shot dead by police in the Bay Street apartment complex shortly before 6:00 PM (local time). Police have safely rescued a woman who was being held against her will in the apartment block," police said.

Dozens of gunshots rang out just after 6 PM in Bay Street with crowds of people fleeing and taking refuge in a nearby supermarket.

The 'Age' website reported that the gunman reportedly called the Channel Seven newsroom during the standoff, telling them "This is for IS (Islamic State)."

Police are now investigating if the incident was terror-related.

Three police officers were injured with two taken to hospital and another treated at the scene, police said.

The woman who was taken hostage is now safe. The siege has now ended but a major police presence, including specialist tactical officers, remains at the scene.